Kenya’s Debt Trap: An Inside Look at the Forces Driving Domestic Borrowing

Kenya’s public debt has ballooned to a staggering Sh11.36 trillion, with new Treasury data revealing an alarming shift towards domestic borrowing that threatens to crowd out private sector growth and derail economic recovery.

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The Numbers Tell the Story

– Domestic debt surged by Sh890 billion in just 12 months to hit Sh6.12 trillion by the end of March, 2025.

– External debt grew marginally by Sh70 billion to Sh5.23 trillion in the same period.

– Debt-to-GDP ratio now at 70% – far above the recommended 55% threshold

– Government borrowed Sh628 billion locally in 9 months, well above the 450.4 billion target.

Why the Rush to Local Lenders?

Facing shrinking access to foreign loans, the Treasury has turned to domestic markets with troubling consequences:

1. The Interest Rate Trap While T-bill rates have fallen (91-day at 8.9% from 16.7%), they remain nearly double World Bank concessional loan rates of under 5%. Each percentage point higher adds billions in debt servicing costs.

2. The Shilling Mirage The currency’s rebound to 129.23/$ trimmed foreign debt by Sh40 billion per unit gain, but this paper gain masks structural weaknesses in export earnings.

3. Failed Reform Promises The administration’s pledge to “reduce expensive domestic borrowing” has been abandoned as IMF conditions bite and global lenders grow wary.

The Economic Time Bomb

1. Crowding Out Private Sector

– Bank lending to government grew 18.7% to Sh2.6 trillion.

– SME loan applications rejection rates hit an estimated 60% in 2025 (Ecofin).

– Manufacturing sector credit growth stagnates at 2.1% annually.

2. Debt Servicing Stranglehold

– 46% of tax revenue now services debt – Health and education budgets cut by Sh120 billion in FY2024/25.

3. Pension Fund Risks

– NSSF’s government bond holdings exceed 65% of portfolio.

– “We’re essentially lending our future to the state,” warns a fund manager speaking anonymously.

The Road Ahead

With the Treasury targeting Sh605 billion in domestic borrowing this fiscal year, analysts warn of:

✓ Higher taxes as revenue falls short.

✓ Credit crunch for manufacturers and farmers.

✓ Rating downgrades if debt hits 75% of GDP.

As Parliament debates the 2025 Finance Bill, one question looms: Can Kenya grow its way out of debt, or is a structural crisis inevitable?

Source; The National Treasury, CBK, Business Daily, Ecofin.

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